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Lessons from Greek crisis on the brink of default

Posted June. 30, 2015 01:39,   

한국어

Greece is on the verge of defaulting (failing to meet the financial obligations). Greek government refused the final negotiation proposal from the international creditors, which called for belt-tightening reform packages in exchange for an extended period for the current bailout that is due on Jun. 30 (local time) and new bailout funds. The Eurogroup (a meeting of finance ministers of the Eurozone) that represents the international lenders has announced a deadlock from the negotiation. Greece will put up a referendum on austerity proposals from the creditors on July 5, but it is most likely for the Athens government to face default regardless of the vote results.

Greece has received bailouts twice in 2010 and 2012 from the EU and IMF to weather the financial crisis. However, the situation is much more serious this time. Feud and distrust run deep between the Tsipras administration, which has won an overwhelming victory in the general election this January thanks to its anti-austerity alliance, and the international lenders

Major causes that have brought worsening deficit and economic crisis in Greece are vast expansion of the public sector, inefficiency, excessive spending on social welfare and weak competitiveness of the manufacturing industries. The leftist government that had taken office for a long period in the 1980s and 1990s expanded the size of public sectors and increased spending of social welfare expenses. Hardline labor unions centering on the public sector exert great influence, which may affect the administration. Interest groups frequently stage illegal and violent protests to carry out their intentions and there is a social atmosphere across the nation in which people look down on laws.

Structural reform that had been performed after two bailouts did not bear fruit amid strong resistance from the groups with vested interests in such areas as public, medicine and education. Greece is a representative example that shows how hard it is to turn back when people get used to excessive welfare. When reviewing the factors that have brought the ‘fall of Greece’ one by one, it reminds of Korea even though there is variation in the extent.

As Greek crisis deepens, the global stock markets plummeted including Korea’s yesterday. Greece may account for a very small portion of Korea’s economy when it comes to the trade volume or financial transactions. However, if Greece’s economic crisis is spread into other European nations or developing countries, it can become a shock to the Korean economy. The government must consider the worst scenario and establish countermeasures to minimize the impact to Korea’s finance and the real economy.